This report provides an overview of the economic and institutional developments in East Timor up to September 1999 and the immediate impact of the violent events that followed the August 30, 1999 referendum to decide East Timor's future status. The report presents the key elements of the strategy recommended by IMF staff to the United Nations Transitional Administration in East Timor (UNTAET) to rebuild the institutions needed to support economic activity and public administration, including external financing requirements, technical assistance, and macroeconomic management training needs. Finally, the report assesses implementation of the strategy and discusses the steps that should be taken to ensure that the strategy will help East Timor to prepare to face future challenges.

The World Bank and the Asian Development Bank (AsDB) are actively engaged in the reconstruction and development work in East Timor. The World Bank led a joint assessment mission in October 1999 to evaluate the economic and social conditions in East Timor and estimate its reconstruction needs. The conclusions of the mission formed the basis for the financing request to donors at a conference jointly chaired by the World Bank and the UNTAET in Tokyo in December 1999. A second donor’s conference was held in Lisbon in June 2000, also jointly chaired by the World Bank and the UNTAET.

A major part of the reconstruction and development effort in East Timor is funded through the Trust Fund for East Timor established at the Tokyo meeting. The World Bank and the AsDB signed a Memorandum of Understanding defining their cooperation and division of responsibilities regarding the trust fund. Under this memorandum, the World Bank will prepare projects in the areas of health, education, agriculture, irrigation, support to small and medium enterprises, and economic capacity building. The AsDB will take the lead in the rehabilitation of roads, ports, power, water, telecommunications, and microfinance development. The two institutions will work together on community development projects. As of end-June 2000, seven grant agreements totaling $52.749 million had been signed under the trust fund.

Community Empowerment Project: The Community Empowerment and Local Governance Project provides block grants to local communities, supporting the creation of elected village councils who then plan and manage these grants according to priorities identified by the community. By mid-June 2000, the project had supported the formation of 341 village development councils across the country. Approximately 20 percent of the 214 projects approved have been for feeder roads, 15 percent for water repair, 8 percent for schools and clinics, and 57 percent for meeting halls and other communal buildings in villages. Thirteen Timorese district accountants have been trained and deployed across the country, together with 79 Timorese facilitators.

Dili Community Employment Generation Project: The project was designed as a short-term safety net project to bridge the employment gap before private sector activities revive and larger public sector projects are launched. Implemented by UNDP, the project helps communities organize to remove debris from Dili neighborhoods and manage solid household waste. It currently operates in ten communities, employing 480 people. The possible extension of the project from September to December 2000 is under consideration.

Small Enterprise Project: The small enterprise project provides lines of credit and training to Timorese entrepreneurs and cooperatives, to put in place capacity early on for Timorese businesses to participate in the reconstruction programs and “kick-start” provision of local goods and services. As of mid-June 2000, the project had received $30 million in applications. About two thirds of the applications have been for financing transport (freight or passenger) and small shops. The first 20 loans have been awarded in Dili.

Roads, Ports, and Power: The project provides for emergency repairs to key infrastructure within a two-year sector framework. Under the project, work has already started on the repair of high-traffic road sections, the rehabilitation of key bridges, the maintenance of priority road sections and the completion of the wharf deck and the landing-craft slipway at the Dili port. The project encourages the build up of local capacity among East Timorese in the public sector infrastructure agencies and in the contracting/construction industry.

Health Sector Rehabilitation and Development Program: The first tranche of the project, which will be active in the next six months, has five components: agreements with service providers at district levels on a standard package of services and coverage to be provided in each district; accelerated implementation of selected high priority activities, in particular the immunization campaign; the establishment of a pharmaceutical logistic system; reconstruction and re-equipment of clinics; and a baseline statistical survey and workshops on health policy for capacity-building and policy development.

Emergency School Readiness Project: The first phase of the TFET education project aims primarily at physical rehabilitation of the education sector. In coordination with UNICEF, which is providing roofing for primary schools, the project aims to ensure that 2,100 primary and junior secondary classrooms are roofed and have furniture, basic textbooks, and teaching-learning materials by the time schools reopen in October 2000. Other rehabilitation works will be carried out between September and December. In addition, the project will complete the design of four prototype schools to replace those that have been demolished.

Agriculture rehabilitation and development project: Asset restoration is a priority of the project. During the period July–December 2000, the project aims to distribute livestock and hand tools, repair designated irrigation systems, and will carry out a vaccination campaign. In addition, Pilot Agricultural Service Centers will be established in each district to supply farm input, services, and training. The Community Empowerment Project will deliver components on rural roads, and the Small Enterprise Project will provide agricultural credit.

Two other projects are being appraised under TFET:

Water and sanitation (WSS): The AsDB water and sanitation mission is expected to complete appraisal and grant agreement for a $4.5 million project by the end of July 2000. The project aims to develop a WSS sector management program, capacity building, and institutional development, and to provide a WSS quick response facility and repair and rehabilitation of water supply systems in Dili.

Microfinance: The AsDB is appraising a project to strengthen credit unions for savings and loans in poor communities. The project will assist community level credit unions with training and information, together with the creation of a central liquidity fund. In addition, the AsDB project will appraise the feasibility of setting up a microfinance bank to provide commercial banking services to micro-entrepreneurs, also expected to be implemented in the same period.

The World Bank is also providing funding for a technical capacity building/human resource survey project through the IDA Post-Conflict Fund. This project provides equipment to Timorese technical groups and finances a human resource survey in each district.

The AsDB is also providing technical assistance for the Community Empowerment Project; a Transport Sector Study to identify management and cost recovery options; development options in the power, telecommunications, and water supply/sanitation sectors; capacity building in governance and public sector management; development of a microfinance program; and statistical assessments and needs analysis for East Timor.